UPDATE 1-Grosvenor, Santander in Spain's first property swap

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By William Kemble-Diaz and Sinead Cruise

LONDON, July 21 (Reuters) - Spanish banking giant Santander (SAN.MC) and privately owned British property group Grosvenor [GROV.UL] have traded the first Spanish property derivative, the two parties said in a joint statement on Monday.

The total return swap trade was based on Investment Property Databank's (IPD) main Spanish property index. All other trade details, including the size and tenure of the deal, were kept confidential.

The property derivatives market mostly offers over-the-counter trading in swaps based on benchmark total return property indexes for fixed periods, in exchange for the London Interbank Offered Rate (LIBOR) plus a spread.

Property swaps enable investors to rapidly increase or hedge exposure to real estate without having to buy or sell bricks and mortar in costly and often time-consuming transactions.

The vast majority of market activity is still centred on IPD's UK All-Property index but the market's growing success has helped to nurture embryonic markets in mainland Europe, North America, and Asia.

"European diversification of a real estate portfolio via swaps or IPD-linked bonds is now a simple, efficient and realistic option," said Martin Collins, Santander's head of property derivative solutions and structuring.

Supporters of Europe's fledgling property derivatives market also hope the trade will inspire investors to use property swaps to help offset potential losses stemming from sharp corrections in UK and Spanish commercial and residential property prices.

"We also see the potential to manage our property development market risk using derivatives," Nick Scarles, Grosvenor's group finance director, said. "Our Spanish operation, managed out of Madrid, undertakes a range of investment, development and fund management activities and we look forward to the evolution of a liquid property derivatives market in Spain."

News of the trade comes almost exactly a year after Grosvenor followed up a test Australian property derivatives trade with the industry's first Japanese property derivatives trade.

Grosvenor also traded the first Italian property derivatives in October.

The company owns and manages global property assets worth 12.9 billion pounds ($25.70 billion), including the estate of the Duke of Westminster, one of Europe's wealthiest men.

At a property derivatives conference in June, Morgan Stanley trader Benoit Pinguet said an inaugural Spanish test trade had been agreed, without naming the parties involved. Santander -- the only Spanish bank then licensed to trade derivatives based on IPD's indexes -- declined to comment at the time.

(Reporting by Sinead Cruise and William Kemble-Diaz; Editing by Erica Billingham)

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